SUPPORTS ITEM NO. 5 CS&B COMMITTEE AGENDA NOVEMBER 7, 1996 ADMINISTRATIVE REPORT Date: October 23, 1996 TO: Standing Committee on City Services and Budgets FROM: Director of Finance SUBJECT: 1996 Operating Budget - September Review RECOMMENDATION A. THAT the proposed adjustments to the 1996 Operating Budget revenue and expenditure appropriations as outlined in this report be approved. B. THAT any shortfall in the 1996 Operating Budget at the end of the year be funded first from the Capital Reserve, including any deficiencies in the Park Board revenue programs as contemplated in the Global Budget agreement. GENERAL MANAGER'S COMMENT The General Manager of Corporate Services RECOMMENDS approval of A and B. COUNCIL POLICY Council's standing instructions require that the Director of Finance report on the status of the Operating Budget as of June 30 and September 30 each year, along with recommendations for any appropriate adjustments. Council must approve transfers to and from reserve accounts. Under provisions of the Park Board global budget, Council has authorized the Director of Finance to maintain a notional Revenue Stabilization Account to balance the annual surpluses or deficits that result from seasonal or weather-related factors affecting the revenue programs. PURPOSE In accordance with Council's standing instructions, this report reviews the status of the revenue and expenditure appropria-tions in the 1996 Operating Budget at September 30, 1996 and seeks Council approval to make adjustments that reflect our revised expectations. DISCUSSION September Budget Review includes detailed reviews of both the revenue and expenditure appropriations in the Operating Budget. The review of revenue appropriations seeks to identify areas of significant variance that could impact on the budget position at year end. Council will note that the proposed adjustments address issues that are generally external in nature or have arisen as a result of experience or new information since the budget was approved in April. The adjustments to the revenue appropriations are problematic in that they will not only impact the 1996 budget, but will also have to be accommodated in the 1997 Operating Budget. This situation is compounded by the fact that our only recourse in 1996 is to utilize one-time funding from sources which cannot be sustained beyond this year. This means that in 1997, these revenue budget reductions will have to be offset by other means. The expenditure side of the Operating Budget also requires some adjustments. While it should be noted that most departments have managed within the allocations provided by Council in April, there are some factors beyond the control of the departments that require funding. A. Adjustments To Revenues Appropriations Revenue Increase/(Decrease) Receipt-in-lieu of taxes ($1,000,000) As reported to Council in the June Budget Review report, the 1996 Operating Budget will be impacted by reductions in grants-in-lieu of taxes that are being proposed by the Port of Vancouver and the CBC. The Port of Vancouver has proposed a settlement of its outstanding grants-in-lieu of taxes for the years 1985 to 1995. This settlement involves a potential retroactive payment by the City to the corporation of approximately $2.1 million and an ongoing annual loss in grant revenue of up to $1.0 million. The proposed settlement is currently being reviewed by City and BC Assessment Authority staff prior to discussions taking place with the Port Corporation. While the outcome of these discussions is uncertain, it is anticipated that the cost to the City in 1996 will be in the order of $1.0 million. Council is also aware that the CBC has disputed the BC Assessment Authority valuation on their regional headquarters building in Vancouver, and the amount of the grant due to the City. Staff have had discussions with BCAA and the corporation and hope to report to Council in the near future on the issue. The Operating Budget has already been adjusted to account for a portion of this potential loss in revenue, however, further reductions are possible. It is recommended that the budget be adjusted at this time to provide a reserve for these potential revenue losses. By-Law Fines - Civilian Parking Enforcement ($500,000) This adjustment reflects the net impact of fewer tickets being issued and a higher number of outstanding and unpaid tickets as compared with expectations earlier in the year. In addition, the 1996 budget anticipated that new revenue generating initiatives, including introduction of the Interactive Voice Response and Pre-Collection systems, would be operating earlier in the year than has proven possible. We are also revising our expectations for these revenues for the 1997 Operating Budget. By-Law Fines - Police ($300,000) The volume of municipal by-law tickets issued by the Police is lower than in prior years, in part as a result of a change in operating priorities in the department, and in part because of legislative changes eliminating the option of a municipal infraction for moving violations. An adjustment of $300,000 is required to fund the shortfall. Sun Life - Additional Premium Refund $337,000 In cases where premium costs on life insurance plans are lower than actual claim costs, the City receives a refund from our group insurance carrier, Sun Life. The initial estimate for the employer's portion of the 1996 refund was $200,000 and this amount was included in the initial budget estimates. However, the actual receipt is $537,000 and it is recommended that the excess of $337,000 be brought into the operating budget. Regional Dental Plan Pool - Refund $270,000 The City will end its participation in the regional dental plan pool as of December, 1996 and an accumulated net surplus of $542,000 will be returned to the City. It is recommended that the employer's share of this refund be brought into the budget. Net Decrease in Revenue Accounts ($1,193,000) B. Adjustment To Expenditures Appropriations Expenditure Increase/(Decrease) Police Department $500,000 The annual budget for Police sworn staff attempts to establish an adequate provision for salary and benefit costs, taking into consideration turnover and recruitment. In recognition of the large number of officers who were recruited in the early 1970s and the potential for a significant number retirements, the 1997 budget included a higher estimate of turnover savings than would otherwise have been the case. Those early estimates have proven to be optimistic and it now appears that the budget will be overspent. In response to lower turnover, the department has reduced the September 1996 new recruit class to offset some of these costs, however, it is anticipated that the Police salary accounts will be overspent by up to $500,000. Engineering - Solid Waste Disposal $130,000 The Corporation of Delta has advised the City that it has neglected to bill the Vancouver Landfill for sewer utility fees and as a result this cost has not been included in the City's 1996 budget estimates. The cost of this fee is about $400,000, a portion of which will be paid from commercial disposals and other landfill users. The net cost attributable to the Operating Budget is $130,000. Queen Elizabeth Theatre $340,000 Since the Operating Budget estimates were developed early in the year, there have been several cancellations of tentative bookings at the civic theatres. The Theatres Board has reduced expenditure estimates where possible, however, there will be a increase in the net cost to the Operating Budget estimated at $340,000. Debt Charges - Library Square Project ($770,000) As reported to Council, the Library Square Capital Project has been completed. The net funding shortfall of the project is to be financed with a loan from the Capital Financing Fund and repaid through a debt charge provision in the annual operating budget. It had been anticipated that these charges would begin in mid-1996, however, due to delays in closing out the accounts, the shortfall has been financed for most of the year out of the City's operating reserves and the debt charges will not start until later in the year. As a result, $770,000 is available for reallocation to other needs. Contingency Reserve $490,000 The June Budget Review Report considered by Council on July 30, 1996, indicated that Contingency Reserve had been fully committed and there were no funds available to provide for further requests. However, as there was no identifiable funding source available at that time, and since several of the approved items would not require funding allocations until later in the year, adjustment to Contingency Reserve was deferred to September Budget Review. It is now proposed that $490,000 be allocated to Contingency Reserve. This additional allocation has two components. First, $290,000 is provided to cover the known outstanding items to year end. In addition, on September 26, 1996, Council approved a 50% municipal assist on regional development cost charges. If the regional DCC bylaw is approved before year-end, the City share of the costs could reach $200,000, which will be provided from Contingency Reserve. Net Increase in Expenditures $ 690,000 TOTAL REQUIRED FUNDING $1,883,000 C. Bringing The Budget Back Into Balance The Director of Finance notes that in past years, we have generally been able to accommodate mid-year budget adjustments through unexpected increases in revenues or expenditure savings. However, these sources are not available in 1996 and the recommended sources of funding to return the budget to a balanced position should be considered extra-ordinary. Moreover, they are not sustainable in the 1997 Operating Budget as offsets to structural changes in revenue and expenditure estimates. The following sources are recommended to offset the funding shortfall identified above and to return the Operating Budget to a balanced position. Liability Insurance Premium $610,000 The Insurance Reserve currently meets the target level that was established with the assistance of an actuary when the plan was established. That balance reflects the accumulated annual contributions from the Operating Budget, net of our claims experience and administrative costs. The City has commissioned an actuarial assessment of the Insurance Reserve for report to Council in early 1997. The level of the annual contribution from the budget will be reviewed in that report. However, as the original target level has been reached, it is proposed that the 1996 contribution from the operating budget, after adjusting for the operating costs associated with the reserve, be returned to the Operating Budget. Fringe Benefit Reserve $1,273,000 Part of the proceeds of winding down the CUPE LTD Trust were placed in a reserve which can be used to pay fringe benefit costs. It is recommended that part of this balance be brought into the Operating Budget at this time to fund CUPE benefit costs, with the balance to be utilized in the 1997 budget as originally planned. TOTAL SOURCES OF FUNDS $1,883,000 PARK BOARD GLOBAL BUDGET Review of the Park Board Global Budget, projected to year end, indicates a balanced position. Under the global budget arrangement, any shortfalls in the Park Board revenue programs are provided for from a Revenue Stabilization Fund. Recommendation B deals with the source for any necessary funding in 1996. ALLOCATION OF CAPITAL RESERVE FUNDS When capital projects funded out of the Operating Budget are completed, variances are funded from or returned to the Capital Reserve. As it is not City policy to maintain other than nominal balances in the Capital Reserve, where they arise, these balances are usually allocated to needed capital projects in subsequent annual Capital Budgets. Before the end of 1996, two capital projects with surpluses totalling $1.9 million will be closed out to the Reserve, as follows: Collingwood Neighbourhood House Project Collingwood Neighbourhood House was developed as part of the 1994 - 1996 Capital Plan, with the City contributing $3.825 million to a child care facility, neighbourhood house and community gymnasium. The developer (VLC) was responsible for any capital costs required in addition to the City's contribution. At completion of the project, it is anticipated there will be a surplus in the budget of approximately $512,000 which will be returned to the Capital Reserve. Commissioner Street Property - Insurance Settlement As Council is aware, the settlement of the claim on the former Sterling Shipyard property resulted in a receipt of $1.4 million. Following through from previous discussions with Council, these funds can now be credited to the Capital Reserve. The balances from these projects, together with funds remaining from the sale of the Oakridge Police Station, will leave the Capital Reserve with funding estimated at $3.5 million. This balance would normally be allocated in the 1997 Capital Budget. However, our review of the Operating Budget at September 30, has indicated areas where additional funding may be required before year end and several contingencies that should be provided for. For example, the budget contains only a minimal amount of funding to deal with a heavy snowfall before year-end and, in this event, our current balanced budget could be quickly forced into a deficit position. Normally, year-end surpluses and deficits in the Operating Budget are transferred to or taken from Revenue Surplus. However, the balance in Revenue Surplus is currently at an historically low level ($4 million) and the Director of Finance does not believe that any further reductions are appropriate. Accordingly, it is a recommendation of this report that any negative variances realized at the year-end be funded first from the Capital Reserve. Further, in 1997, Council will be asked to provide direction to address concerns about the current level of Revenue Fund reserves and how these might be boosted to provide an adequate cushion for the contingencies which the City faces in the coming years. 1997 OPERATING BUDGET PROJECTIONS Staff are completing a preliminary review of the 1997 Operating Budget which indicates that there are likely to be some significant challenges in meeting Council's taxation objectives in the coming year. The issue of the structural revenue reductions in payments-in-lieu of taxes and by-law fines were reported earlier in this report. In addition, it is projected that there will also be reductions in short term interest earnings as a result of persistently lower rates in the financial markets. As Council is aware, there is also considerable uncertainty about the status of transfer payments from the Provincial Government. The City currently received approximately $23.2 million in payments including unconditional grants, Canada Assistance Plan support and the Police Equalization grant. Reductions in these payments will clearly be difficult to fit within the 1997 budget. Under normal circumstances, the projections would have been brought to Council during the early fall as the first step in developing the 1997 Operating Budget. This presentation also provides an opportunity for Council to provide direction on policy issues related to preparation of the estimates. However, with the uncertainties surrounding the 1997 Operating Budget, this process will be delayed until December when more information is available. At that time, the new Council will be able to make the necessary policy decisions to guide the preparation of the 1997 Budget. CONCLUSION A review of the 1996 Operating Budget as of September 30, 1996 indicates that several adjustments are appropriate based on changed expectations since the budget was approved in April. In summary the changes are as follows: Revenue shortfalls $ 1,193,000 Expenditure increases 690,000 Total funding requirements 1,883,000 Funding sources ( 1,883,000) Net Budget Position 0 With these recommended adjustments, the 1996 Operating Budget will be remain in balance. However, even with the balanced position, the Director of Finance notes that some uncertainty remains in the 1996 budget and departments are being asked to take particular care to control discretionary expenditures to year-end. * * * * *